How A $175,000 Stock Investment Loss Can Make You A Better Investor
Peter purchased the stock at $200 per share.
He had watched the stock charts for three months. The hype might pay off this time. He considered looking at the company’s annual report. But what he needed was a snapshot of the company. He could get that from his favorite news and app sources. Reading an annual report was time-consuming. His schedule was busy enough already. And he was not a novice investor. Those often-touted 2,000% stock returns were not dreams to him. He had snagged a couple of them in his 20 years of playing the market. Playing was his term for investing.
He tried to push his major stock losses from his mind. He had experienced more of those than he wanted to remember. Waiting for the stocks to recover was brutal. The heavy toll was financial and emotional. Memories like that rattled him. They worked against him. He believed in forgetting mistakes and moving on.
The Roller Coaster
The stock climbed to $250 in less than two weeks. Peter purchased more shares. His sources said the stock was on a surge. And they were right. Five weeks later, the stock plowed beyond $300.
Peter’s phone alerted him one evening. A news story about the stock had come up. He skimmed it and saw the share price. It had dropped to $250. Peter considered selling the next morning. He read a few stories on his phone about the stock. The defenders dismissed the critics. The stock had a hiccup. That was all. Peter held on to the shares.
The stock recovered most of its losses in three days. Another story surfaced about the stock. The stock opened at $175 the next day. Peter was baffled. The story had not been that disappointing. Earnings were off by a few cents for the quarter. He had seen this movie before. He would let the stock get back to even and sell.
The next day, the stock was at $150. It tried to rally for a week. But it did not recover. It drifted down to $125. But Peter’s sources said the stock would recover as usual.
Real Valuation
I saw Peter a week later. We had our usual conversation about value investors and growth investors. I have never believed in the separation of growth and value. Every company has a price. The question is whether the investor will pay that price? Do they think the stock price is worth it?
Peter asked me to look at the annual report of this company. Tell him what he missed. I told him he had missed reading it. He laughed and said, “Maybe.”
I went through the annual report. Within a few minutes, a problem glared at me from the page. I asked Peter what the company’s net income was again. He had his phone on one of his sources. The number he gave me was off by 80%. Most of the company’s net income was investment income. When the investment income was deducted, the net income had grown at an average of 2% per year for five years. And the company’s operating margins were not improving.
He wanted to know what the company was worth. When I did the math, the stock was worth $100 per share. Peter also did a quick valuation and came up with $125 per share.
Peter said that if he had purchased the stock 30% below $125, he would not have lost money. He said he would start paying closer attention to the company’s fundamentals. The extent of the loss made him sick to his stomach.
Just hearing talk about an investment means little. The facts are in the numbers. Because if you don’t know the numbers, you are playing the stock market. Not investing. And you will lose most of the time. And the times that you win in the stock market, the stock market will eventually reclaim those winnings. Knowing what to pay for a stock and when to sell it forces us to do real homework.
Mo Hicks
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